Understanding the Benefits of FX Forward Contracts
Foreign exchange (FX) forward contracts are invaluable tools for UK businesses engaged in international trade. These contracts provide a mechanism to manage currency risk effectively, offering several distinct advantages that enhance financial stability and strategic planning.
Think your business doesn't get exposed to FX risk? Are you sure? Anyone with a client based abroad, a supplier in the Eurozone or who wants to buy, sell, supply or trade with any provider not within the UK will have some FX risk.
Did You Know?
- A 2020 study by East & Partners revealed that 80% of UK businesses experienced currency losses within a six-month period. For companies with turnovers up to £100 million, the average loss was £52,200
- Despite the risks, only a small fraction of SMEs employ hedging strategies. A report indicated that merely 2% of SMEs use hedging tools, in stark contrast to 92% of Fortune 500 companies (ref Eako)
- A survey by American Express revealed that 42% of UK business owners reported losses attributed to foreign currency fluctuations. Additionally, 15% of businesses indicated that such fluctuations caused them to lose money on a monthly basis
- The same study found that 43% of UK small and medium-sized enterprises (SMEs) do not actively manage the risks posed by foreign currency fluctuations, potentially exposing them to unforeseen financial challenges
Hedging Against Currency Risk
One of the primary benefits of FX forward contracts is their ability to hedge against currency fluctuations. For businesses importing goods from overseas, changes in exchange rates can significantly impact costs.
By entering into an FX forward contract, businesses can lock in an exchange rate today for a future date, thereby mitigating the risk of adverse currency movements. This predictability allows companies to budget more accurately, maintain profit margins, and avoid potential losses due to volatile exchange rates.
What makes things easier is that we provide our clients with access to award winning FX services. It is one of those services that other finance brokers ignore, whereas we recognise that so many SMEs in the Gatwick diamond area are exposed to FX risk, even if it is only a few times each year.
Want to know more or not be one of the 80% of UK firms who lost money for doing nothing? Check this article out.